HOLDING ON TO YOUR HOUSE AS FORECLOSURES CREEP UP, NEW INDUSTRY GIVES HELPING HAND.

Byline: BARBARA CORREA Staff Writer

Rising interest rates and a cooling housing market has made it a nail-biting time to be a homeowner.

Many Southern Californians who dove into tempting zero- percent-down loans with huge variable-rate risk now realize they may have bitten off more than they can chew.

The changing times are forcing some into foreclosure, but others are making use of their options and managing to hold on to their homes.

Take Bianca Garcia, a manufacturing production coordinator in Palmdale. Like many Southern Californians trying to buy homes as prices went through the roof and lenders opened up their wallets, Garcia secured her loan through a finance company instead of a conventional lender. It's an option to which many consumers with questionable credit turn on their first step into the housing market.

So in 2003, she and her husband paid $173,000 for a four-bedroom, two-bath house with a three-car garage in Palmdale. Two years later and 90 days in default on her loan, Garcia was on the road to foreclosure.

``We just had so much going out at the time,'' said Garcia, who is still living in her house, thanks to an arrangement she made with a mortgage investment firm.

The company, 2-year-old TerraCotta Group LLC, located in Manhattan Beach, paid the first and second mortgages on the house, put it in a trust, and began work on repairing Garcia's credit. It plans to refinance the house by the end of this year, and Garcia will then buy it back with a conventional lender.

Indeed, if there is some good news for homeowners who took out variable-rate loans or loans they really couldn't afford in recent years, it's that a new industry has arisen to help bail them out.

Still, there is only so much these firms can do. Foreclosures are on the rise, and the peak is probably still a few years out. Foreclosures in Southern California are up almost 30 percent since January -- by 56 percent in Riverside County, 10 percent in San Bernardino County and 16 percent in Los Angeles County, according to foreclosure tracking firm Default Research Inc.

``I started the business two years ago,'' said Tingting Zhang, president of TerraCotta Group. ``We had 90 people a day in foreclosure. As of today, the number is 295.''

She expects foreclosures to peak between 2008 and 2010 as the California real estate market continues to cool. ``It's no longer appreciating 20 to 40 percent a year.''

Zhang blames part of the increase on the creative loans and more liberal lending environment of recent years and the subsequent climb in interest rates. But there is more to the story, she said.

One factor is the changing real estate market. ``We don't have a white-hot listing market anymore. ... If people (once in default) are going to sell their house to pay off the lender, they really need to do it in a month, and they can't do that now.''

Cities like Pasadena and Long Beach might be more vulnerable to a foreclosure wave, she said, because prices have long been high in those areas, while growth is stagnant because they are mature markets. Areas like Palmdale and Lancaster and other parts of Riverside County offer somewhat of a buffer against widespread foreclosure because they are still relatively affordable and still offer great growth potential.

``Because it has depreciated so fast, (that market) will slow down, but on the other hand it's still desirable and trying to attract white-collar workers.''

Aside from the loan environment, the cooling market and people taking on more debt than they could handle, Zhang attributes much of the increase in foreclosures to old-fashioned causes, like illness and job loss.

Joyce Maloney, senior counselor for mortgages and debt counseling at Consumer Credit Counseling Service of Santa Clara and Ventura counties, with headquarters in Camarillo, said job insecurity comes up frequently in her sessions with consumers facing foreclosure.

``Jobs are just not secure anymore, and incomes are not secure anymore,'' she said. ``You see 50 to 75 percent of their income is going to housing.''

Maloney said half the increase in foreclosures is because consumers did not understand their loans or took out loans inappropriate for their income levels.

But she blames the other half on job loss, pay cuts and general indebtedness.

So what's a broke homeowner to do?

ACT NOW

No. 1 is to get help as early as possible, preferably before going into default at all.

Some consumers make the mistake of thinking about mortgage payments in the same way they think of a credit card payment.

``Bankruptcy is no longer as threatening to lenders,'' said Zhang.

``Foreclosure is very different. If you're late on your credit card, it's acceptable even though it affects your score. But if you're late on your mortgage, it's a very serious matter.''

If you're already in default, it still pays to intervene as early as possible. There's a big difference, from the bank's point of view, between being 30 days late and being 120 days late.

And these days, foreclosure notices seem to be starting sooner, said Maloney. ``It used to be three or four missed payments. Now it's as quickly as the second missed payment,'' she said.

Even in the 11th hour, there's a lot that can be done to keep a house. One couple came to TerraCotta's office the day before their home was to be sold by the lender, Countrywide Financial. Countrywide agreed to postpone the sale while the house was bought by TerraCotta and put into a trust to repair the credit.

CHOOSE A PRO

Deciding who to call is not that straightforward. TerraCotta Group markets itself as a one-stop shop that can offer all the options available by traditional means.

``A Realtor can sell it, a lawyer can file for bankruptcy protection, and a mortgage broker can refinance,'' said marketing manager Cynthia Hogle, but a company like hers can assist with all of these.

Still, there may be situations where homeowners in default need to hire an attorney or a Realtor for other reasons. And a homeowner could certainly refinance with a mortgage broker.

But if homeowners are already in default, those loans will likely be harder to get approved. So homeowners who decide to try to refinance with a broker should choose one with specific experience in distressed situations. The bottom line is that consumers facing foreclosure need to do a lot of homework and obviously look out for scam artists, notorious for preying on desperate homeowners facing eviction.

GET EDUCATED

Ideally, prospective homeowners should take time to educate themselves a bit before jumping into homeownership. Fresh Start Financial, a credit-repair company in Van Nuys that has seen foreclosures increase in the past six months, plans to start holding seminars on responsible use of credit.

``The mentality is, OK, you're buying a home for, say $650,000. It's a great price. ... You're thinking you're getting a great deal, but you're forgetting that you are still going to be paying $5,500 with insurance and interest a month,'' said Fred Lopez, a manager at Fresh Start.

``With a good credit report you could get these loans without proving income on it. We just saw someone with a 680 score, but he had a house that went into the foreclosure process. Now he's being turned down for other houses. We see a lot of people with the monster homes and cars, and they are so in debt it is insane. If you understand money, you're not going to go buy a car for $110,000. You're going to buy a 2-year old car where most of the loss will already be gone from it.''

Using the same logic, Joyce Maloney said the rise in foreclosures reflects the fact that many people who bought houses in recent years probably should not have.

``The government has said everyone should be a homeowner,'' she said. ``Well, not everybody should be a homeowner. Some are not secure enough in job opportunities to even think about it. The sad part is when someone goes through foreclosure, they usually will not buy another house. They've been burned once and don't want to be burned again.''

barbara.correa(at)dailynews.com

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Refinancing best to salvage equity

Refinance - This is the preferred way to avoid foreclosure because you keep your house without doing any fundamental damage to the rest of your financial profile. Even if you are not facing default on a loan, it's advisable to change from a variable rate to a fixed rate if possible. One of the risks in refinancing, especially with a mortgage broker without experience in distressed situations, is that the new loan could be denied, leaving the homeowner even further along in default.

Private Money - This is an attractive option if the money is coming from a trustworthy source. Some consumers borrow from family. Alternatively, there are entities that serve as both mortgage brokers and real estate investors using private money. There are legitimate hard money lenders as well. The operating advice with all these options is be wary of con artists who prey on people desperate to keep their house. Verify the legitimacy of a company through the California Department of Real Estate or the California Association of Mortgage Brokers.

Personal bankruptcy - In general, under a Chapter 7 bankruptcy filing, a home could be liquidated as part of debt settlement. A Chapter 13 filing is for homeowners with equity who want to hold on to the house. Most financial experts say bankruptcy should be a last resort and caution against predatory bankruptcy attorneys.

CAPTION(S):

photo, 2 boxes

Photo:

(color) no caption (Holding on to your house)

Box:

(1) Foreclosure rate hits double digits 

Source: Default Research Inc.

(2) Refinancing best to salvage equity (see text)